Annual vs. Forensic Audit

Started by JeanneK3 • 3 replies • 3325 views

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JeanneK3 (Maryland)
Posts: 562

Posted:

My association does an audit of the books yearly. Will this audit reveal if money is being embezzled by the management company? The reason I ask is that Maryland Condominium law says that 5% of the unit owners can request a "forensic audit." What is the difference between a regular audit and a forensic audit? How do you decide you need a forensic audit?
Thanks.
Jeanne

TimB4 (Tennessee)
Posts: 21,061

Posted:

Jeanne,

A financial audit certifies that the financial statements fairly represent the financial position of the company/association for the year that was audited. This audit would typically determine if a company is guilty of financial statement fraud which is the intentional misrepresentation of a company's financial position through the misstatement or omission of certain transactions or disclosures in the financial statements

A forensic audit looks for actual theft or misuse of funds by an employee. A forensic audit requires a specifically trained accountant.

Unless you actually suspect theft a financial audit is usually sufficient. Sometimes, a simple financial review is all that is needed.

The cost for an audit is expensive. We have a 100K annual budget and received quotes of $10,000
Our financial review only cost us $2,000

If the membership desire a forensic audit they typically must also be willing to pay for this service (probably through a special assessment) as it will cost more than a financial audit.

Hope this helps. You can always google "forensic audit vs audit" to learn more.

Tim

SteveM9 (Massachusetts)
Posts: 3,699

Posted:

You should form a Audit committee. Much cheaper and much more detailed. Pick random or suspicious transactions and follow them back. Get copies of invoices for that transaction, visit the company see if it exists, talk to them, etc. The fraud that is hardest to catch is when a person pays a fake company for something. Another was to find fraud is if you are overpaying for something. That "overpayment" might be getting split between the vendor and the person doing the fraud. ie: add $2000 to that invoice and we will split it, HOA will pay, dont worry.

Auditing is an ongoing process, not something you do 1 time a year, or 5 years.

NatalyaR (Alabama)
Posts: 55

Posted:

Would you please explain how to form an audit Committee and how it would act? Thank you

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